The Durbin Amendment And You
There's been a lot of talk about the Durbin Amendment in credit card processing and merchant services circles. It's been one of the hottest topics in the industry. People are scrambling trying to predict how the legislation will affect both individual merchants and the processing business as a whole.
Host Merchant Services wants to simplify the topic and make it easy for our clients to understand what this key piece of legislation does and how it will affect them.
The Nuts and Bolts of This New Law:
The place to start is to define exactly what this law is. The Durbin Amendment is a provision added to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The overall act was passed as a response to the economic recession in the latter half of the decade and has been touted as the most sweeping change to financial regulation in the country since the Great Depression.
The Durbin Amendment focuses on debit card interchange and reform in the payment processing industry.
It seeks to stop major credit and debit card networks from imposing penalties on small businesses, merchants and government agencies. The law applies to banks with over $10 billion in assets and restricts these large banks and credit card companies from using their dominant market power to force merchants to accept anti-competitive restrictions.
To put it simply, large credit card companies are no longer able to punish merchants for offering discounts to customers for using another card network; or discounts for using cash, check, debit card or gift card and loyalty cards; or set a minimum or maximum transaction amount for payment by card.
And the law states that these banks have to charge debit card swipe fees that are "reasonable and proportional to the actual cost" of processing the transaction. To enforce this part of the law, the Durbin Amendment gave the Federal Reserve the power to regulate debit card interchange fees.
On June 29, 2011, the Fed issued its final rule on how it would enforce that portion of the law. The Fed ruled that the maximum interchange fee an issuer can receive from a single debit card transaction is 21 cents plus 5 basis points multiplied by the amount of the transaction.
Not to stray too far from the topic, but an explanation of what Interchange and Basis Points are is needed. Interchange is a fee paid between banks for the acceptance of a card based transactions.
Usually it is a fee that a merchant's bank (better known as the "acquiring bank") pays a customer's bank (better known as the "issuing bank").
Basis Points are a unit of measure used in finance to describe the percentage change in the value or rate of a financial instrument. One basis point is equivalent to 0.01% (1/100th of a percent). In most cases, it refers to changes in interest rates and bond yields.
This July 2011 ruling by the Fed on the interchange cap also allowed issuers to raise their interchange fees by as much as one cent if they implement specific fraud-prevention measures.Issuers eligible for this adjustment, could then receive a maximum interchange fee of 24 cents for the average debit card transaction (valued at $38), according to the Federal Reserve.
This cap took effect on October 1, 2011 and was predicted by multiple news sources to cost banks roughly $9.4 billion annually.
What is the Actual Impact For Merchants?
Even before the law went into effect in October 2011 there had been quite a lot of speculation on how these regulations would impact merchants and acquirers and credit card issuers.
The debate was keyed on the question of who was going to benefit from the forced savings that the cap on interchange will bring. The law's intent is for the savings to be felt by the merchant directly. That's the overall goal of the entire act in terms of finance reform after all.
However, many sources speculated that the merchants would end up having to shoulder the burden of the extreme cuts in revenue that this cap brings. Those who predicted that merchants would end up worse off by the amendment suggested that the banks, not wanting to take a $9 to $10 billion dollar loss in revenues for the year, would simply add fees to other payment options or get rid of premiums and extras that they had been offering merchants prior to the cap being put in place.
Higher fees on checking accounts and the removal of debit card rewards programs were suggested as a response banks would have to the initial interchange cap the Durbin Amendment started out with (a 12-cent cap instead of the revised 21-cent cap).
The amendment was strongly debated and lobbied against by banks and credit unions, which are against the amendment because all those debit card swipe fees profit the financial institution that issued the debit card - namely banks and credit unions.
Card issuing banks typically take in about 1.3% of every dollar you spend on your debit card as a fee from the merchant. This amounts to billions of dollars a year of profit for those banks. And this amendment is designed to drastically cut that revenue.
Interchange fees are supposed to cover the risk of fraud, transactional costs, and other overhead for the banks. But due to a lack of negotiating power on the merchant side, the fee became a major source of profit margin at every bank that offers checking accounts, which is most every bank.
Subsequently, competition between banks has caused this profit center to be used in subsidizing free premium services, like free checking accounts and surcharge-free ATMs.
Cutting this fee and putting a cap on it is designed to create a large wealth transfer from debit card issuers to merchants, and will likely end many free premium services at banks.
On top of that, there is also speculation that the merchant won't see much of the savings in the first place. And this speculation is tied directly to the payment processing industry.
The basics of the industry are that merchants do not deal directly with large credit card issuers like Visa and MasterCard. Rather, they deal with acquirers, or middle men, who offer payment processing of credit cards and debit cards to merchants through their acquirer company's own goods and services.
The rampant speculation is that the acquirers will reap the large savings from the Durbin Amendment, since they are in line between the credit company and the merchant, and will shift high fees right back onto the merchant. This wiggle room in the middle, if it takes place as predicted, could see a large short term spike in profits for acquirers.
What is the Impact For HMS Merchants?
The HMS Guarantee is already in place before the Durbin Amendment was ever passed.
The HMS Guarantee is unsurpassed pricing, support and customer service. We design payment processing solutions that let you focus on running your company. We save you money by finding you the lowest rate. We give you free processing terminals and paper for your business. We promise no hidden fees, no annual fee, no application fee, a low PCI fee, and no monthly minimums. We offer a straightforward pricing plan and your rate with HMS will never increase. We do not lock you into a contract and do not charge early termination fees. The HMS Guarantee is designed around the core concept of you staying with us because you are happy with your service.
This means HMS merchants are already getting the benefits of savings on their transaction fees, are already not being penalized for seeking competitive transaction processing solutions and are already getting swipe fees that are reasonable and proportional to the actual cost.
Host Merchant Services is founded on the idea that we are going to find you the best rate possible for your processing needs. We were already in your corner before the Durbin Amendment was enacted and will continue to be in your corner finding you the best savings to help your business succeed.
Host Merchant Services wants to simplify the topic and make it easy for our clients to understand what this key piece of legislation does and how it will affect them.
The Nuts and Bolts of This New Law:
The place to start is to define exactly what this law is. The Durbin Amendment is a provision added to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The overall act was passed as a response to the economic recession in the latter half of the decade and has been touted as the most sweeping change to financial regulation in the country since the Great Depression.
The Durbin Amendment focuses on debit card interchange and reform in the payment processing industry.
It seeks to stop major credit and debit card networks from imposing penalties on small businesses, merchants and government agencies. The law applies to banks with over $10 billion in assets and restricts these large banks and credit card companies from using their dominant market power to force merchants to accept anti-competitive restrictions.
To put it simply, large credit card companies are no longer able to punish merchants for offering discounts to customers for using another card network; or discounts for using cash, check, debit card or gift card and loyalty cards; or set a minimum or maximum transaction amount for payment by card.
And the law states that these banks have to charge debit card swipe fees that are "reasonable and proportional to the actual cost" of processing the transaction. To enforce this part of the law, the Durbin Amendment gave the Federal Reserve the power to regulate debit card interchange fees.
On June 29, 2011, the Fed issued its final rule on how it would enforce that portion of the law. The Fed ruled that the maximum interchange fee an issuer can receive from a single debit card transaction is 21 cents plus 5 basis points multiplied by the amount of the transaction.
Not to stray too far from the topic, but an explanation of what Interchange and Basis Points are is needed. Interchange is a fee paid between banks for the acceptance of a card based transactions.
Usually it is a fee that a merchant's bank (better known as the "acquiring bank") pays a customer's bank (better known as the "issuing bank").
Basis Points are a unit of measure used in finance to describe the percentage change in the value or rate of a financial instrument. One basis point is equivalent to 0.01% (1/100th of a percent). In most cases, it refers to changes in interest rates and bond yields.
This July 2011 ruling by the Fed on the interchange cap also allowed issuers to raise their interchange fees by as much as one cent if they implement specific fraud-prevention measures.Issuers eligible for this adjustment, could then receive a maximum interchange fee of 24 cents for the average debit card transaction (valued at $38), according to the Federal Reserve.
This cap took effect on October 1, 2011 and was predicted by multiple news sources to cost banks roughly $9.4 billion annually.
What is the Actual Impact For Merchants?
Even before the law went into effect in October 2011 there had been quite a lot of speculation on how these regulations would impact merchants and acquirers and credit card issuers.
The debate was keyed on the question of who was going to benefit from the forced savings that the cap on interchange will bring. The law's intent is for the savings to be felt by the merchant directly. That's the overall goal of the entire act in terms of finance reform after all.
However, many sources speculated that the merchants would end up having to shoulder the burden of the extreme cuts in revenue that this cap brings. Those who predicted that merchants would end up worse off by the amendment suggested that the banks, not wanting to take a $9 to $10 billion dollar loss in revenues for the year, would simply add fees to other payment options or get rid of premiums and extras that they had been offering merchants prior to the cap being put in place.
Higher fees on checking accounts and the removal of debit card rewards programs were suggested as a response banks would have to the initial interchange cap the Durbin Amendment started out with (a 12-cent cap instead of the revised 21-cent cap).
The amendment was strongly debated and lobbied against by banks and credit unions, which are against the amendment because all those debit card swipe fees profit the financial institution that issued the debit card - namely banks and credit unions.
Card issuing banks typically take in about 1.3% of every dollar you spend on your debit card as a fee from the merchant. This amounts to billions of dollars a year of profit for those banks. And this amendment is designed to drastically cut that revenue.
Interchange fees are supposed to cover the risk of fraud, transactional costs, and other overhead for the banks. But due to a lack of negotiating power on the merchant side, the fee became a major source of profit margin at every bank that offers checking accounts, which is most every bank.
Subsequently, competition between banks has caused this profit center to be used in subsidizing free premium services, like free checking accounts and surcharge-free ATMs.
Cutting this fee and putting a cap on it is designed to create a large wealth transfer from debit card issuers to merchants, and will likely end many free premium services at banks.
On top of that, there is also speculation that the merchant won't see much of the savings in the first place. And this speculation is tied directly to the payment processing industry.
The basics of the industry are that merchants do not deal directly with large credit card issuers like Visa and MasterCard. Rather, they deal with acquirers, or middle men, who offer payment processing of credit cards and debit cards to merchants through their acquirer company's own goods and services.
The rampant speculation is that the acquirers will reap the large savings from the Durbin Amendment, since they are in line between the credit company and the merchant, and will shift high fees right back onto the merchant. This wiggle room in the middle, if it takes place as predicted, could see a large short term spike in profits for acquirers.
What is the Impact For HMS Merchants?
The HMS Guarantee is already in place before the Durbin Amendment was ever passed.
The HMS Guarantee is unsurpassed pricing, support and customer service. We design payment processing solutions that let you focus on running your company. We save you money by finding you the lowest rate. We give you free processing terminals and paper for your business. We promise no hidden fees, no annual fee, no application fee, a low PCI fee, and no monthly minimums. We offer a straightforward pricing plan and your rate with HMS will never increase. We do not lock you into a contract and do not charge early termination fees. The HMS Guarantee is designed around the core concept of you staying with us because you are happy with your service.
This means HMS merchants are already getting the benefits of savings on their transaction fees, are already not being penalized for seeking competitive transaction processing solutions and are already getting swipe fees that are reasonable and proportional to the actual cost.
Host Merchant Services is founded on the idea that we are going to find you the best rate possible for your processing needs. We were already in your corner before the Durbin Amendment was enacted and will continue to be in your corner finding you the best savings to help your business succeed.
